May 23, 2019

Will Your Business Survive the End of Prop 13?

Will Your Business Survive the End of Prop 13?

Although over a year away, the 2020 election features not only a contested Presidential race but also a number of ballot initiatives that will dramatically affect your business. One such initiative, The California Schools and Local Community Funding Act of 2018, better known as the “split roll” property tax initiative, would repeal many of the protections of Proposition 13 as they apply to business property.

You remember Prop 13, don’t you? Back in the 1970s, property values in the state were increasing. Seeing the increased value of a property, tax assessors increased property assessments thereby increasing the amount of property taxes owed. Every year, as the values went up so would property taxes. This made it difficult for homeowners and businesses to plan for the future.

While property values were increasing, homeowner’s paychecks and profits earned by businesses did not keep pace. Older individuals on fixed incomes found it especially challenging to handle the ever-increasing tax burden. This led tax revolt leaders Howard Jarvis and Paul Gann to draft Proposition 13.

Prop 13, officially called the People’s Initiative to Limit Property Taxation, was an amendment to the Constitution of California. Its goal was to keep property taxes manageable and predictable. The way it works is simple.

Prop 13 Protections

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With Prop 13, property tax rates are capped at 1% of the property’s assessed value. This is based on the market value as of the date of the most recent change in ownership or new construction. Prop 13 also capped property tax increases at 2% per year.

When a property is sold, it is reassessed at its new purchase price. It is taxed at a rate of 1% of the new value, and from then on, Prop 13’s tax limits apply until it is sold again. Of course, there are some loopholes such as the ability to pass property down to family members while protecting the assessment from 1978.

With Prop 13 in place, both businesses and homeowners know what their property tax burden will be from year to year. This also benefits the state government because they can predict tax revenue from year to year. Everyone is protected from very high or very low reassessed property values each year.

This is why Prop 13 received overwhelming support at the ballot box in 1978.

The End of Prop 13

The split roll property tax initiative, California Schools and Local Community Funding Act of 2018, will remove Prop 13 protections from businesses. This means companies must pay property taxes based on the property’s value today and not the original purchase price. Moreover, that property will continue to be reassessed every three years to the current market price.

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Let’s say in the early 1980s you paid $1,000,000 for a building in Los Angeles. That means you’re currently paying about $10,000 or 1% per year in property taxes. With the removal of Prop 13 protections, your property will be reassessed to determine its 2019 value. Over the last 40 years, if that property value increased to $5,000,000, you would now pay $50,000 a year in property taxes. Also, as the value of your property increases, so will your property taxes.

These are not random numbers pulled from thin air. These figures are based on a discussion I had with a member of our association. He’s looking at an increase of $40,000 a year in property taxes on his business. How can a company remain competitive with an increase like that?

Commercial Rental Properties

If you rent your building, you too will feel the effects of the split roll property tax initiative. Even though the initiative will exempt business owners with property holdings of less than $2 million, you will be affected. The owner of the property where your building is located will, without a doubt, pass on the property tax increase to you.

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Imagine a small printing company who’s renting a location. When the landlord’s property taxes are raised, the printer’s rent will increase, and they will have no choice but to increase the cost of their products. Will they be competitive with the print shop that has bought a small building, worth less than $2 million and sees no increase in their property taxes?

Now expand that to small companies throughout California. What will happen to the corner donut shop, the local car repair locations, and small manufacturers? They will all see an increase in their rent due to the rise in property taxes. The resulting increase will be passed on to the consumer.

There are additional consequences that will affect everyone living in California. According to the California Chamber of Commerce, the split roll initiative “would harm consumers, employers, and ultimately the economy.”

The Chamber expressed concern that smaller businesses will be less able to absorb a sudden property tax increase. In California, 93% of printing companies have 49 or fewer employees thus qualifying as small businesses. As a result, small businesses, like printers, will need to cut costs. These cuts will include:

  • Reducing employee compensation and benefits
  • Reducing the number of employees
  • Relocating or closing their business

All of these options will lead to less economic activity, and thus less job opportunity.

These are not empty threats. During a conversation with another PIASC member, whose property taxes will double if this initiative passes, I learned his simple business philosophy. He said, “If I make more money I pass that on in higher wages or hiring new people. If I’m losing money, I either pay them less or lay them off.”

Corporations as the Enemy

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A big fear of this PIASC member is that those pushing the initiative will attack corporations saying they’re “ruthless and vile, and are abusing their employees.” However, that’s not how he runs his company. He said, “I’m afraid the pundits will include our little company in that group.”

That’s the problem. The campaign in support of the initiative will most likely make businesses look evil. Companies are hoarding all the money and making all the profits while the poor school districts are being robbed and need more money.

Who Benefits Most from the Split Roll Tax?

According to California’s Legislative Analyst’s Office, the split roll initiative will raise between $6.5 billion to $10.5 billion per year. The monies will first go to the county assessors to cover their administrative costs, with no limits placed on those costs.

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Second, the state General Fund will take some money to backfill income tax losses coming from higher property tax deductions. Then, after the state gets their share, whatever is left will be split 60/40. Cities, counties and special districts get 60% of the balance of the funds. Schools and community colleges will get the rest, with little or no requirements on how the money would be spent.

So, even though the initiative is called the California Schools and Local Community Funding Act of 2018, the schools are the last to see any of the money.

The Negative Effects of the Split Roll Initiative

California’s business environment is going from bad to worse. In 2016 alone 1,800 companies left the state. Based on news reports, many big-name companies have left in the past few years. These include:

  • Carl’s Jr.
  • Toyota
  • Nestle USA
  • Nissan North America
  • Jamba Juice
  • Occidental Petroleum

Corporate relocation expert Joe Vranich says, “A rule of thumb among business site-selection experts is that five companies leave for each one that actually gets reported in the press.” So it’s likely that as many as 10,000 companies have left in recent years. And along with them, went millions of dollars of print collateral.

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When businesses leave so do jobs. Maybe that’s why, in 2017, some 130,000 more residents left California than arrived from other states. California has seen more than 15 consecutive years of net resident losses to other states. The California Schools and Local Community Funding Act of 2018 will exacerbate this problem.

In addition to causing companies to close or leave the state, the ballot initiative has several flaws. According to the California Chamber of Commerce, “the ballot initiative does not include taxpayer protections, cost controls, accountability measures, or transparency requirements. The proponents even removed a cap on administrative expenses—so the government can waste this new tax money on administration and overhead with no limits or checks.”

We cannot possibly complain if we have not exercised our right to speak out.

In addition, the amount of revenue raised will depend heavily on the strength of California’s real estate markets. In 2008–2009, commercial property values dropped 35% due to the economic recession. In 2019, values have once again risen. If this initiative passes, the state’s property tax revenue streams would be considerably more volatile than they are now under Prop 13.

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It’s Time to Take a Stand

Every printer in this state needs to become familiar with and take a stand on the California Schools and Local Community Funding Act of 2018. If we don’t say no to the coming business property tax increases, our industry and many others will be severely threatened.

As an industry, we can make a difference. Imagine the power of over 4,800 business owners combined with our more than 71,600 employees. As a group, we generate over $13,600,000,000 in revenue. Those are impressive numbers. We represent a significant part of this state’s economy.

With industry members located in all 58 counties of the state from Del Norte County in the north to San Diego County in the south, we can reach each and every one of our state senators and assembly members. This outreach will begin on June 18 and 19, 2019.

On those dates, PIASC members will be heading to Sacramento. This is your chance to start making a difference. We cannot possibly complain if we have not exercised our right to speak out. Our ultimate goal is to have legislators stop and think, “I wonder what the printing industry would think about this policy idea, or what the impacts would be on them.”

Having legislators speak with business owners and managers directly is a compelling way to ensure that our perspectives are considered. There is no registration fee to attend this event. You only need to take care of your travel expenses.

To register for the Printing Industries of California Legislative Action Day, please contact Kristy Villanueva at (323) 728-9500, Ext. 215.

For more information about the event, click here to download a flyer

About the Author

Printing Industries Association, Inc. is devoted to helping our members succeed…and there are many ways that we do so. Need group medical insurance? We’ve got dozens of plans to choose from, and a designated local customer service rep to handle your account. Have questions about human resources issues, sales tax or compliance? We’ve got the answers.

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